Markets
Regulation makes cryptocurrency markets more efficient – News
New research into cryptocurrencies finds that the most regulated currencies create the most efficient markets.
This crypto regulation, often provided by cryptocurrency exchanges like Binance, can also help protect investors by providing reliable public information.
“Both small and institutional investors should know that if they invest in currencies without any regulation, they may experience price manipulation or a serious lack of insider information,” he said Liangfei Qiuprofessor of management at the University of Florida and one of the authors of the new study.
“Instead, they may want to invest in coins listed on platforms that provide some verified information, which serves as a kind of minimum regulation that protects investors and makes markets more efficient,” he said.
The study is the first to analyze how regulation affects the efficiency of cryptocurrency markets. The researchers analyzed a range of cryptocurrency offerings – from essentially unregulated ICOs, or initial coin offerings, to exchanges that set and enforce their own rules – and compared digital currencies to traditional exchanges, which are highly regulated by the government.
Unregulated ICOs were the least efficient. But initial public offerings, another crypto offering known as IEOs, have been almost as efficient as traditional initial public offerings, or IPOs. In IEOs, exchanges set minimum standards and rules and commit to providing investors with reliable information about the value of cryptocurrency.
Exchange-based regulation is entirely voluntary, but could provide guidance to policymakers who are increasingly interested in providing some crypto regulation for still-emerging markets.
“If policymakers want to ensure that the market works well, they need to provide some structure to promote regulation,” Qiu said.
To assess the efficiency of stocks and cryptocurrencies, Qiu’s team analyzed their variance ratios, a measure of how predictable an asset’s future price is. Economists have long argued that future asset prices are essentially unpredictable – as long as everyone has the same information about the underlying value of those assets. Market inefficiencies such as insider knowledge can begin to distort prices, often at the expense of investors who are out of the loop.
Qiu collaborated with UF Warrington College of Business professors Mahendrarajah Nimalendran and Praveen Pathak and his former doctoral student Mariia Petryk, now a professor of business at George Mason University. Their study will be published in the Journal of Financial and Quantitative Analysis.
Eric Hamilton February 1, 2024